The definition of asset based lending are loans that are guaranteed by something of value (asset/collateral) that if the loan is not repaid that asset or collateral is used to do so. The lender has the right to take the collateral if the borrower defaults on the loan. Collateral comes in various forms including accounts receivable, inventory, property, equipment, or marketable securities.
Borrowers can use assets as collateral in asset-based lending. Most lenders prefer liquid collateral to physical assets or other illiquid collateral types. Businesses with short-term cash flow issues can turn to asset-based lending if collateral is available.
How Does Asset-Based Lending Work?
Asset-based lending is an option for companies with tangible assets. Essentially, a lender evaluates the assets of a business and determines a loan amount based on the value of the assets.
Of course, the lender will not provide a loan for the sum of your available collateral. Instead, the lender will determine a loan-to-value ratio based on the industry and the type of collateral assets. If you accept the loan offer, you’ll receive a lump sum or a line of credit. Most lenders will require a monthly or weekly report on the collateral assets for the duration of the loan.
Here’s a closer look at the details of asset-based lending:
- Loan-to-value ratio: The loan-to-value (LTV) ratio is a critical component of asset-based lending. As a borrower seeking access to the largest possible loan, you’ll want a lender that offers a high loan-to-value ratio.
- Loan-to-value varies based on the asset and the lender: The exact LTV offered by lenders varies. But in general, you can expect a 50% LTV on inventory and 70% on accounts receivable.
- Asset-based lending example: Let’s say that your business currently holds $100,000 in accounts receivable. You find a lender that is willing to offer you an LTV ratio of 70%. With that, you could obtain an asset-based loan of up to $70,000.
- Loans vs line of credit: If pursuing asset-based lending, you can find options for both lines of credit or traditional loans. A line of credit is a revolving credit option that allows you to borrow what you need when you need it. But a traditional loan comes with a lump sum principal payout and regularly scheduled repayments. An asset-based line of credit offers more flexibility. But traditional loans often come with lower interest rates.
You might wish to further explore what is asset financing.
Who Is Asset-Based Lending Recommended For?
Asset-based lending isn’t the right move for every business. But it’s a great option for many. Here’s when asset-based lending makes sense.
- Businesses with substantial assets: If you have large amounts of inventory, expensive equipment, or substantial accounts receivable, then an asset-based loan is a viable option. A business without substantial assets would struggle to obtain an asset-based loan.
- Businesses seeking short-term cash flow flexibility: It’s natural for businesses to have ups and downs. If you are looking for a way to steady the ship with the help of your extensive assets, this form of lending could be a good fit.
Where Can I Get An Asset-Based Loan For My Business?
Are you a business owner seeking an asset-based loan? Traditional financial institutions like credit unions and banks offer this type of loan. Plus, some online lenders are specifically set up for your small business lending needs.
Here’s where you can start your search for the best lender for your business needs:
- U.S. Bank: U.S. Bank offers asset-based lending opportunities. If you want to pursue a loan with U.S. Bank, you can check out the options here.
- Bank of America: Bank of America offers asset-based loans to its customers. You’ll need to contact your Bank of America Business Capital specialist to find out more.
- SouthStar Capital: SouthStar Capital offers asset-based lending for lines of credit. Although the exact percentages can vary, the lender advertises that lines of credit will make 90% of accounts receivable available, 75% of equipment value available, and 50% of inventory value available. You can find out more about this option here.
- Rapid Finance: Rapid Finance offers asset-based loans that range from $50,000 to $10 million. You can choose to make regular repayments on a daily, weekly, or monthly basis. Here’s where to learn more about Rapid Finance's asset-based loan options.
- InterNex Capital: This online lender offers business lines of credit based on your accounts receivable. With loan amounts from $250,00 to $10 million, your business can find the funding it needs.
- altLINE: altLINE offers revolving lines of credit based on your accounts receivables. Although you’ll need a credit score of at least 500, this could be a great opportunity to unlock a flexible funding opportunity.
If you don’t see an option you like, then consider reaching out to your current financial institution. Many banks and credit unions have some asset-based lending options available.
How To Apply For An Asset-Based Loan
Decided that an asset-based loan is the right move for your business? Here’s how to apply:
- Evaluate your business finances: Before you apply for a collateral-based loan, take the time to evaluate your business financial state. It’s important to drill down on what you need the funds for and how the loan will impact your business. You don’t want to take out a loan that won’t help the long-term goals of your business. You might want to explore the various types of collateral for loans.
- Identify your assets: You’ll need to have business assets to apply for this type of funding. Start by making a list of your accounts receivables, inventory, and any equipment on hand.
- Confirm the status of your assets: Asset-based lending is only available on assets that don’t have a lien against them. Take a minute to confirm which assets are available as free and clear property.
- Shop for the right lender: With your documents ready, it’s time to find a lender that offers the type of financing you are looking for. For example, you’ll need to decide if you want a regular loan or a line of credit. Not all lenders offer both.
- Submit an application: Since you’ve already identified your assets, this part should be easy.
- Review your offer: The lender will present a loan offer. You’ll need to decide if it’s in your best interest to continue.
- Finalize the loan: Many lenders will require a field audit. After that, it’s time to sit tight as you wait for the loan to be finalized.
Pros And Cons Of Asset-Based Lending
Like all other loan types, asset-based lending comes with some advantages and disadvantages.
Here’s what to keep in mind, starting with the pros:
- Easier to obtain than unsecured loans: The collateral attached to an asset-based financing option makes it less risky for the lender, which makes it easier to obtain. See unsecured vs secured loans.
- Put valuable assets to use: If you need funds, you can take advantage of the assets you have available.
- Relatively low rates: Asset-based loans often come with better interest rates than unsecured loans.
Now for the cons:
- Not all assets are considered: Some assets won’t be allowed as collateral.
- Loan costs: You’ll face relatively high loan administration and origination fees.
- Putting your assets on the line: If you can’t keep up with the loan payments, then the lender has the right to take your assets.
- Reporting requirements: Lenders will ask for a regular status report on the assets for the duration of the loan. This extra bit of paperwork can be tedious.
What You Should Know Before Trying Asset-Based Lending
Before you jump into your asset-backed loan application, here are a few things to note:
- Not all assets are treated equally: Lenders prefer liquid collateral, like marketable securities or accounts receivable, over physical assets.
- Physical assets receive lower LTV ratios: The preference for liquid assets leads to lower loan amounts for physical items.
- Terms vary widely: Every asset is unique. With that, lenders offer loan terms and conditions on an individual basis, making it hard to shop around.
If your business has enough collateral, asset-based lending is a viable alternative to traditional loans. Small businesses with substantial assets should consider this option when seeking funding. Ready to give it a try? Take the time to assess your available assets today.